Insurance needs for leased cars

Insure.com

WEST HARTFORD, Conn. (Insure.com) -- As if you didn't have enough to worry about in understanding the fees involved in your lease contract: You've got early-termination costs, extra-mileage surcharges, and wear-and-tear fees.

But you also need to know about the "hidden" costs of auto insurance required by the lease and the ramifications of crashing your leased vehicle -- especially if you "total" it.

Most leases require you to purchase more auto insurance than your state's minimum liability coverages. For example, you'll likely have to purchase liability coverage of $100,000 per person and $300,000 per accident for bodily injuries, and $50,000 worth of liability insurance for property damages (also known as 100/300/50). Most states' minimum requirements are about one quarter of that. For more on minimums, read Minimum levels of required auto insurance.

In addition, you'll probably be required by the lease to buy collision and comprehensive insurance. These coverages pay for losses due to fire, theft, vandalism, civil riot, and collisions with animals. Both coverages require a deductible and, depending on your lease contract, those deductibles are subject to a cap. For example, a Chrysler Gold Key lease says that your collision deductible can be no more than $750 and your comprehensive deductible can be no more than $500.

Many lease contracts include gap insurance -- coverage that will pay the difference between what you owe on your car lease and what the insurer pays in case your car is "totaled." Your insurer has the option of either "totaling" your vehicle -- paying you or the lienholder the actual cash value of the car -- or repairing the vehicle after a bad accident. (Insurers will generally total the car after damages surpass 70 percent of the vehicle's worth.)

If your insurance company totals your leased car, whether or not you receive the insurance proceeds directly is of little consequence. Chances are good that you'll have to turn all of that money over to the lienholder, but that's no guarantee you've satisfied your lease contract.

It's not uncommon to still owe money to your lienholder after turning over the "total" insurance proceeds. That's where gap insurance comes in to play. It will pay the remaining lease bill so you can start fresh with a new lease or a new financing deal. If your lease contract does not include gap insurance, it's a good idea to shop around for the best price. Gap insurance premiums run the gamut, but without it, you could be stuck with hefty payments on a car you no longer drive, plus the payments for your replacement car. Ouch!

One important stipulation of many lease contracts that include gap insurance is that if you don't buy the required comprehensive and collision coverages and your car is totaled, you will not receive the gap coverage. For more, read Save yourself some grief: Buy lease or loan gap coverage.

In addition, until you or the lienholder receives the insurance proceeds, you should continue making your regular monthly car-lease payment. It's conceivable that if you stop your payments, your loan could default, creating all kinds of ugliness on your credit record. A loan in default can hinder your ability to get new auto financing and new auto insurance at worst; it can raise your loan's interest rate or auto insurance premium at best.

Scrutinize your repairs

After an accident, if your insurer decides to repair your vehicle rather than total it, make sure the repairs will not create further problems for you at the end of your lease. Most lease contracts say you're responsible for "excess wear and tear." That includes any damage, even if it's covered by insurance. The bottom line is that you want to return your vehicle to the dealership in the same condition as when your lease began.

Make sure all the paint matches, your tires match, and that your vehicle is repaired with original equipment manufacturer (OEM) parts. If you don't, you are responsible for the repair or replacement of any and all of these at the end of the lease period.

Find out about your insurer's rules when it comes to replacing sheet metal parts after an accident. Some insurers will pay for OEM parts if the vehicle is two years old or newer or has less than 20,000 miles on it. Some will allow OEM parts to be used but will require you to pay the difference between an aftermarket or salvage part and an OEM part.

Leasing a car might be an affordable option, but if you're involved in an accident, failing to meet the lease's terms can trigger significant extra costs and inconvenient scenarios that can lighten your wallet and sour your lease experience.

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